Is Chewy Stock a Hidden Value as EBITDA Expands?

Chewy, Inc. CHWY has made meaningful progress on profitability while leaning on a subscription-heavy model that supports steadier demand than most e-commerce categories. The stock looks undervalued, even after rebounding from recent lows. 

Still, near-term optics could be clouded as management frames the fourth quarter as an investment period. With a Zacks Rank #3 (Hold), the setup looks better suited for patience than for chasing a quick momentum move.

CHWY Valuation Looks Discounted Versus Benchmarks

CHWY trades at 0.83x forward 12-month sales. That compares with 1.9x for the Zacks sub-industry, 1.61x for the Zacks Retail-Wholesale sector, and 5.19x for the S&P 500. In other words, the market is already pricing Chewy at a sizable discount. 

The $29 price target is built on a slightly higher 0.88x forward sales multiple. That framework implies modest multiple expansion rather than a wholesale re-rating, which fits a stock where execution is improving but near-term demand and promotional dynamics remain mixed. Over the past five years, CHWY has traded between 0.55x and 4.54x sales, with a median of 1.24x, underscoring how sensitive the multiple can be to sentiment around growth and margins.

Chewy’s Rating Mix Points to a Wait-and-See Setup

Chewy's Zacks Rank signals a neutral near-term setup over the one- to three-month horizon. The Style Score snapshot adds useful color: VGM is an A, with Growth at A, while Value and Momentum both sit at C. 

In plain terms, the profile says Chewy’s fundamentals and longer-run earnings trajectory look constructive, but the stock is not screening as a classic “cheap” value play, and it is not acting like a momentum name either. That combination supports a hold-and-monitor stance.

Chewy Price and Consensus

Chewy price-consensus-chart | Chewy Quote

CHWY Profitability Progress Is Real but Still Building

Chewy’s margin story has been compounding, not driven by a one-time swing. Through the first three quarters of fiscal 2025, adjusted EBITDA margins held in the mid-single digits at 6.2% in the first quarter, 5.9% in the second quarter, and 5.8% in the third quarter. Gross margin in the third quarter was about 29.8%.

For fiscal 2025, management narrowed adjusted EBITDA margin guidance to 5.6%-5.7%, which reflects about 90 basis points of year-over-year expansion. The levers include a mix shift toward higher-margin contributors such as sponsored ads and health, plus operating discipline and automation-supported efficiency. Management also reiterated a multi-year path to a 10% adjusted EBITDA margin.

Chewy’s Demand Drivers Are Stable, Not Explosive

Chewy’s revenue base is increasingly anchored by Autoship. In the third quarter, Autoship represented 84% of net sales, up from 80% a year ago, and Autoship sales grew 13.6% year over year to $2.61 billion. That subscription scale supports predictability, retention, and better planning, while also helping reduce unit costs across fulfillment and marketing.

The tradeoff is that the broader industry environment remains subdued. Management has pointed to a restrained demand backdrop, with low-single-digit pet industry growth and flattish pet household formation. This is a stability story more than a demand surge story, which matters when investors are deciding how much growth to underwrite in the valuation.

CHWY Fourth Quarter Could Pressure Near-Term Optics

The fourth quarter is framed as an investment quarter, with promotions and elevated media rates that can limit sequential operating leverage. That mix can cap gross profit flow-through and delay SG&A leverage, even if the longer-run margin trajectory remains intact.

The tone shows up in guidance and cost commentary. For fiscal 2025, advertising and marketing is expected to run around 6.5%-6.6% of net sales. Fourth-quarter adjusted earnings guidance of 24 to 27 cents a share also implies a sequential step down from the 32 cents delivered in the third quarter.

Chewy Customer Adds Are a Key Sentiment Trigger

Customer momentum was solid in the third quarter, with active customers at 21.2 million, up 5% year over year, and net sequential adds of roughly 250,000. Engagement strengthened as well, with net sales per active customer at $595, up about 5% year over year, alongside higher app engagement.

The near-term concern is the implied sequential moderation into the fourth quarter. Management’s guidance suggests the fourth quarter could see a sequential decrease of roughly 150,000 active customers versus the third quarter. If that plays out, the market could read it as evidence that the recent growth spurt was temporary, even if per-customer engagement continues to improve.

CHWY Capital Allocation Offers a Backstop

Chewy’s balance sheet and liquidity provide a cushion while it invests. The company ended the third quarter with about $675 million in cash and cash equivalents, roughly $1.5 billion in total liquidity, and no debt. Free cash flow in the third quarter improved to $175.8 million from $151.8 million a year ago, and management has targeted free cash flow conversion of roughly 80% of adjusted EBITDA. 

Shareholder returns also remain in the toolkit. Chewy repurchased about $55 million of shares in the third quarter and had roughly $304.9 million remaining under authorization. For investors weighing CHWY's Zacks Rank, a reasonable framework is to look for two upside signals: clearer evidence that active customers can re-accelerate without heavy promotions, and continued stepwise adjusted EBITDA margin expansion toward the 10% long-term goal. If the fourth-quarter “investment” impacts near-term results but customer engagement and cash generation hold, the hold case stays intact.

CHWY’s Peers

Central Garden & Pet Company CENT, with a Zacks Rank #2 (Buy), is one relevant read-through on category demand in pet-related products. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Petco Health and Wellness Company, Inc. WOOF, with a Zacks Rank #3, is another point of comparison on how retail and services strategies translate into margins across the pet landscape.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research